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What’s Really Holding Back the Economy?

If you ask Republicans, “What’s wrong with the economy?” or, “Why is there such little growth?” They all give a similar response. They say, “government is too big, it is spending too much.” They say, “the President is not creating a business-friendly environment – the President hates small businesses!” According to Republicans, if only government would get out of the way, and let businesses do their thing then we would get the economic recovery America has been waiting for.

If this story were true, we would expect to see stagnate or declining business investment accompanied by skyrocketing government investment. This would illustrate an economy in which private sector growth is being hampered by too much government (the crowding out argument). The problem is, the ‘Obama hates small businesses and government is spending too much’ story does not line up with what is actually happening in the economy.

In fact, what’s happening is the exact opposite of what should be happening if the Republicans were correct. This graph shows non-residential investment, which can be understood as business investment, and government investment. Since President Obama’s policies have gone into effect, business investment has actually gone up, not down, as conservatives want us to believe. And government investment is actually at an all time low – not at socialist levels as our friends from the right continue to insist.

Now, I am not trying to say the private sector is back to normal and doing just fine, but the story that too much government is holding back this recovery just doesn’t align with what is actually going on. What’s actually going on suggests we need more government investment, not less. The economy is struggling due to a decrease in government. This came mostly from sharp cuts to state and local governments, which in turn wiped out more than a million jobs. It is precisely this “American style austerity” Republicans have been demanding that is hindering our economy, not government.

The proper response to the economy we face is not to blame government and decry any government expenditures, but to realize government can and should be used to help with this recovery.